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Teck's credit rating gets boost on stronger cash flow predictions

S&P Global Ratings has upgraded its long-term corporate credit rating and senior unsecured debt ratings on Canadian diversified mining heavyweight Teck Resources Ltd. to BB+ from BB.

The rating agency said Oct. 12 that it now expects Teck's credit metrics to materially exceed its previous forecast due to improving cash flow from stronger metallurgical coal and base metal prices as well as debt repayment.

S&P holds the view that the Vancouver-based miner will sustain credit ratios that are conservative for the rating over the next two years.

Teck has generated close to C$2.5 billion in cash flow over the past three quarters despite high CapEx and significantly reduced debt, according to the ratings firm.

EBITDA is estimated to be around the mid-C$5 billion mark in 2017 and about C$4 billion in 2018, while adjusted debt-to-EBITDA is tipped to be 1.2x this year and 1.5x over the next two years despite S&P's declining metallurgical coal price assumptions.

S&P predicts funds from operations to debt will be in the range of 45% to 55% in 2017 and 2018.

Meanwhile, Teck has reduced its debt bill to just below US$5 billion after repaying about US$1.3 billion in the first half of this year and has no material repayments due until 2021.

S&P predicts the company will continue to generate positive free cash flow over the next two years, with added spending flexibility following the near-term completion of its 20%-owned Fort Hills oil sands project.

The rating agency expects metallurgical coal prices to dip from just above US$180 per tonne this year to US$140 per tonne in 2018 and US$110 per tonne in 2019, while the zinc price is forecast to shift downward from roughly US$1.25 per pound in 2017 and 2018 to just below US$1.20 per pound in 2019.

However, S&P said the improvement in Teck's estimated net debt position mitigates the impact of the gradually declining coal price assumptions.

The outlook for the company is stable.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.